Ally Financial Stock Is a Buy in an Evolving Auto Market, Analyst Says

The auto market is changing. And some of those changes mean there are opportunities for investors, even in the beaten up sector.

Stephens analyst Vincent Caintic upgraded shares of
Ally Financial
(ticker: ALLY) on Monday to Overweight, Stephens’ equivalent of Buy, from Equalweight, the equivalent of Hold. What’s more, he raised his target price to $44 a share from $37, up almost 30% from recent levels.

The upgrade might seem surprising. The car market is weak. Vehicle sales are falling in the U.S., Europe and China, and Ally shares are already up a lot in 2019. The stock has returned almost 52% year to date, far better than the 18% return of other financial components of the
S&P 500
over the same span.

“Ally should be able to maintain or increase auto yield as it increases its application funnel, with dealers such as Carvana, CarMax [and] Fair,’ Caintic said in a Monday research report. He thinks profit margins can improve as the company lends to new automotive buying and leasing models.

Carvana
(CVNA), for instance, is an online seller of cars trying to disrupt traditional auto dealerships.

Fair.com is a privately held company that uses a subscription model for auto consumers, and uses Ally for financing. “Simple is better and more cost effective,” Fair founder Scott Painter told Barron’s recently. “[Fair is] about 40% less than a rental, car comes with everything other than fuel, including: tax, title, registration, bundled insurance, and maintenance.”

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Fair is also a partner of
Uber Technologies
(UBER). Painter said many Uber drivers don’t qualify for cost-effective auto loans and turn to rentals instead. Fair, he said, is a much cheaper option for them.

CarMax, finally, is America’s largest used-car retailer and that market is far larger than the market for new cars.

As potential robo-taxis grow and fleet ownership changes, changing consumer preference for car ownership, Ally looks like one way for investors to stay invested in automotive trends. And Ally shares trade for less than 6 times Caintic’s estimated 2020 earnings, a steep discount to other financial stocks in the S&P 500.

Ally is predominantly an automotive lender, financing cars for U.S. consumers. It was once called General Motors Acceptance Corp., the lending arm of
General Motors
(GM) and became a stand-alone corporation after the financial crisis around 2009 and sold shares to the public in 2014.

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